Consumers, Gas Prices Better Off Without Help From Politicians

Conspiracy theories, price caps aren't answer

Memorial Day and summer usually bring higher gas prices. And it is becoming increasingly clear that most politicians don’t have a clue about what causes gas prices to rise.

A 10-month, 396 page Senate subcommittee report desperately searching for a price gouging conspiracy among big oil companies didn’t find one. With nothing illegal going on, the report was left to complain that there aren’t enough oil companies competing in the market.

At the same time the Senate was releasing its report, the Hawaii legislature was voting to impose price caps on gasoline starting in 2004. The old saying is that those who don’t learn from history are doomed to repeat it. The gas lines in Hawaii, and in any other states foolish enough to institute price controls, will resemble the long lines of the 1970s because price caps will likely cause supply shortages instead of low prices.

The irony in all this government activity is that letting the market dictate gas prices, even if that means higher prices, would help us achieve many of our long-term energy and environmental goals – conservation, reduced dependence on foreign oil and reduced emissions through the use of alternative fuels.

Whether it is buying a car or buying groceries, we all make budgetary decisions everyday. And as crazy as it seems to politicians, consumers will adjust to any increase or decrease in gas prices. Faced with high gas prices, we might choose to drive less, combine trips, carpool, or choose more fuel-efficient vehicles – but somehow, someway, we will adjust our lifestyles accordingly.

Following the OPEC embargo and price caps of the 1970s, Americans embraced a new breed of fuel-efficient vehicles. Sales of Volkswagens, Hondas, Nissans and Toyota’s soared as consumers decided they could save time and money by driving more fuel efficient cars.

American automakers also learned a lesson when consumers turned to those fuel-efficient cars, almost all of which happened to be foreign made. Today, even as SUV sales soar, U.S. carmakers are preparing for changing consumer wants and needs by ramping up development of hybrid cars that get excellent gas mileage and produce much lower emissions. Ford is producing a hybrid version of its Escape SUV. Dodge and General Motors have plans for hybrid, full-size pickup trucks.

It seems everyone is embracing the principles of capitalism, except politicians. Election year grandstanding is partially to blame for the rhetoric and misguided actions, like Hawaii’s price caps. Just as the seasons change, every couple of years, wannabe superhero politicians launch investigations to save poor unwitting consumers from Big Oil’s plot to take our money.

Big Oil only wishes it were so simple. After all, most oil companies are not turning huge profits these days – ChevronTexaco’s first quarter net income was down 70 percent. Contrary to the Senate—s assertions, oil companies are in fact fiercely fighting each other for our money. Additionally, regulations, that vary from state to state, force oil companies to jump through numerous costly hoops before getting gas to the pumps.

Many areas across the country, especially California, New York and the Midwest, use special boutique, clean-burning fuels designed to meet various Clean Air standards set by the Environmental Protection Agency and the states themselves. Unfortunately, different regions of the country have set different standards and thus require different fuels. So, if a refinery that produces gas for Chicago or St. Louis has a problem or accident, oil companies can’t simply turn to a refinery in California to make up the shortage because the gas being produced there is completely different.

In addition to the boutique fuels, we pay lots and lots of taxes at the gas station. The federal government adds 18.4 cents a gallon in taxes, and then states tag their own taxes on top of that. For example in addition to the federal taxes, California, Connecticut, Hawaii and New York all charge over 30 cents per gallon in taxes. Obviously, oil companies aren’t the only ones profiting from the sale of gasoline.

Politicians should stop trying to control natural fluctuations in the petroleum market. They can’t prevent problems at refineries and they definitely can’t control what goes on in the Middle East. The government’s best course of action is to step away from the gas pumps and let the market run its course. Politicians will be pleasantly surprised at how savvy consumers are and how proficient free markets are.

Lynne Kiesling is director of economic policy at Reason Foundation and senior lecturer in economics at Northwestern University.